Tuesday, September 14, 2010

What a fairy tale the bulls have going for them... the economy is improving... the data is "fine"... fine enough to buy stocks of course, but not so fine that the Fed won't be forced to come in and support the entire economy with a new flurry of quantitative easing. (fancy talk for buying up U.S. debt and diluting the U.S. dollar). You truly can have it both ways... the new paradigm goldilocks economy.

It appears the selloff this morning, aside from being a perfect technical bounce of S&P 1116 (remember I said yesterday as long as resistance turned support at 1116 held, bulls have complete control) was aided by a Goldman Sachs note that the Fed could begin QE2 as soon as November. This fits perfectly with my mosaic that this is all a big symphony orchestra of steroid injection, [Nov 18, 2009: Our Economy is on Steroids] but to avoid political pitfalls it would happen post election. Not that the economy needs steroids because it's fine on its own (look at the stock market after all). While I've said the QE2 ponzi would happen post election I think it might be an early 2011 event because the Fed has said between the lines they'd need to see significant weakening in the economy. Right now the economy is more like a staggering drunk (ex multinationals) coming out of the bar at 2 AM... i.e. the square root recovery. And apparently the past 2 weeks of economic data has signaled everything is fine (ahem). But then again, I am not the 4th arm of government like Goldman Sachs, so if they say it's likely to begin in November... it is likely to be November.

If you are new to the website, Quantitative Easing is going to do very little for the real economy... the banks are flush with reserves sitting at the Fed; there is no lack of monies to lend out which would be a somewhat useful reason for QE... not the lies they are putting out now. The problem is lack of end demand by a broken economy. Period. [Feb 9, 2010: It's Not about a Lack of Financing, It's About Lack of End Demand] QE is just a handout to capital markets to try to goose valuations of anything that moves as the 'wealth effect' is the true goal here. Greenspan said as much a month or so ago when he said an increase in asset values is better than any stimulation that can come out of Washington. There is no huge demand for loans as the real economy is dealing with the after effects of a few decades of debt accumulation. You can't force people to take on more debt - even if you hand the banks another 50 trillion. The Fed (and fed govt) has been unsuccessful in reinflating the housing bubble which is the broadest wealth effect lever... hence it will go back to the 1999 playbook as it has been trying to do (and did a great job of in 2009), and flood capital markets with U.S. pesos (formerly known as dollars). Hence, most of these rewards will be extremely top heavy in the top 2% (maybe to offset their loss of tax breaks hah) and some trickle down to the top 10-20% which actually have some decent exposure to capital markets. Everyone else? Well...go shop because you won't get diddly for your savings.

The U.S. Federal Reserve could announce a new program of asset purchases to support a weak economy as early as November, according to Goldman Sachs Group Inc. We don’t expect this at the Sept. 21 meeting, but in November or December there’s certainly a possibility that it will be announced,” Jan Hatzius, chief economist at the bank, said Tuesday. He added the Fed is likely to buy U.S. Treasurys worth around $1.0 trillion to kick-start the economy.

To fight the financial crisis in 2008 and 2009, the Fed bought $1.7 trillion in mainly mortgage-backed securities, a move that helped to keep mortgage and other long-term borrowing rates low. That program ended in March. But with the recovery slowing, the Fed said Aug. 10 that it would reinvest the proceeds of mortgage bonds into U.S. Treasurys to prevent its portfolio of securities from shrinking. The question now is whether the central bank will start a new program of asset purchases that would increase the size of its $2.0 trillion balance sheet further.

Goldman Sachs expects this to happen soon given the weakness in the U.S. economy as a result of lower business inventory accumulation and a fading fiscal stimulus. The bank expects the U.S. unemployment rate to creep back up to 10% by early 2011 from 9.6% in August and to stay around that level for most of the year.

Hatzius is actually one of the most respected guys and combining brains with the access of information the boys at Goldman has, everyone gives their thoughts much more weight than anyone else. Here is what he had to say on CNBC yesterday - pretty much a carbon copy of what I've been saying. Inventory rebuild finishing up, and government stimulus slowing... those are the 2 things (outside of exports to Asia) that have led to the economy bump the past 4-5 quarters.

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